Property development appeals to many people, as it can achieve a significant return on investment when done right. However, it’s not something to dive into without careful planning, as overspending is a genuine concern, especially for first-time developers.
Need help keeping your budget in check? In this guide, learn practical budgeting tips for your first property development project.
Understand your true project costs
When it comes to property development, a rough budget will not suffice.
You need a highly detailed financial plan as one of your first priorties, as this will help keep you on track. Factor in everything, including:
- Land cost
- Stamp duty
- Legal fees
- Surveys
- Architects costs
- Project manager costs
- Planning applications
- Site preparation costs
- Raw materials
- Labour costs
- Service connection costs
- Marketing costs
- Contingency fund
It involves a lot more than just the purchase price!
Secure the right finance
Most property developers require some kind of finance. There are several funding options available for investing in property, you need to know which one to use for the relevant stage in your project:
Development finance: This is a specific type of short- to medium-term funding used to financially support ground-up builds.
Buy to let mortgages: If you are building a property to subsequently let out to residential tenants, you can exit development finance by paying it off with a buy to let mortgage, which has a lower interet rate than development finance and is intended for long-term borrowing.
Commercial mortgages: If you are building a business premises that a company or multiple companies will operate their business from, then a commercial mortgage is the appropriate long-term borrowing product to pay off your development finance with.
There’s a lot involved in the terms, including loan terms, fees, and repayment structures. Using a specialist broker is key to securing highly competitive financing tailored to your exact project. Go to commercialtrust.co.uk to learn more and seek help from experts.
You can also pay back development finance by selling the property(ies) you have built, with the money left over forming your profit.
Set a realistic timeline
Setting a realistic timeline early on means you are more likely to avoid unexpected costs, such as interest on loans, and extended labour costs.
To do this, include a buffer in your schedule (additional time added to the project), as this will reduce the number of surprise expenses and keep you ahead of the game.
You should also strategically plan for potential setbacks that often occur. For example, poor weather affecting the ability to build, shortage of materials, or legal issues.
Choose contractors carefully
When choosing contractors, there is much to consider. The last thing you want to do is aim for the cheapest construction workers you can find. Sure, it might save you some money in the short term, but it could also lead to poor work that costs even more to fix.
To avoid this, vet contractors thoroughly, looking specifically at their past projects, insurance, and references. You should also receive a fixed quote in writing to ensure cost transparency.
Monitor your spending
Monitor as you go to catch overspending early on, and allow yourself to adjust the plan, if necessary.
To do this, keep a running budget and compare it against what you have spent each week – these clear numbers are useful for seeing whether you’re sticking to a budget (and whether the budget was feasible in the first place).
Make this process easier by using spreadsheets or a budgeting app. It is important to have a clear, accessible way of viewing your budgeting and spending.
In conclusion
Budgeting discipline is a significant part of property development success. It is frighteningly easy to overspend without a tight, dedicated budget.
To avoid financial pitfalls, it is always best to seek expert advice, whether for creating a budget or seeking the best type of funding.
